Corporate Risk Management, 2nd Edition

6

Portfolio Analysis and Cash Flows

6.1 INTRODUCTION

This chapter briefly defines portfolio analysis and outlines portfolio construction, strategy and the concept of bundling projects. Models used in financial markets are then examined. Cash flows and cash flow principles are also outlined and an example of portfolio modelling and its benefits is discussed.

6.2 SELECTING A PORTFOLIO STRATEGY

Ghasemzadeh and Archer (2000) define portfolio selection as the periodic activity involved in selecting a portfolio of projects which meets an organisation’s stated objectives without exceeding the available resources or violating other constraints. The present authors suggest that a corporate body can consider its SBU as part of a portfolio of businesses and similarly an SBU can consider its projects as a portfolio of investments.

Given the investment objectives and the investment policy, the investor must develop a ‘portfolio strategy’. Portfolio strategies can be classified as either a passive or active portfolio.

An active portfolio strategy uses available information and forecasting techniques to seek a better performance than if the portfolio was simply diversified broadly. Essential to all active strategies are expectations about the factors that influence the performance of the class of assets. For example, equity forecasts may include earnings, dividends or price- earnings ratios (Fabozzi 2002).

A passive portfolio involves a minimum expectational input and instead relies on ...